Venture Capital

Key Messages

Venture capital investment in Canada amounts to just 0.03 per cent of GDP, well below the U.S., Sweden, and Switzerland, which are all “A” performers.

Canada needs a larger and more dynamic equity and venture capital industry that is ready to invest in and provide guidance to Canadian seed, start-up, and early-stage companies.

Why is venture capital important to innovation?

Innovation is about enhancing a firm’s competitive position through new and improved products, processes, and services. Innovation often requires a significant amount of capital investment—sometimes well beyond the means of a firm’s internal capacity. In these cases, access to additional equity—typically private financing—is often sought. Private equity plays an important role in fuelling innovation.1
One form of private equity is venture capital.

Venture capital is “private equity provided by specialized firms acting as intermediaries between primary source of finance (e.g., insurance, pension funds, banks, etc.) and private companies whose shares are not freely traded on any stock market.”2
Venture capital predominately focuses on early-stage investments and targets young, emerging growth companies.3
It is a key source of both financial and managerial experience for new business ventures in Canada, and is a critical component of many countries’ innovation ecosystem. Unfortunately, Canada underperforms on the venture capital report card. Canada simply does not have the same level of “speculative capital activity” as most of its peers.4

How does Canada’s performance compare to its peers?

Canada ranks 14th among 15 peer countries on the venture capital report card and scores a “D” grade. Venture capital investment in Canada amounts to just 0.031 per cent of GDP—well below that of the U.S. and Sweden.5
In 2011, just 444 Canadian companies were financed through venture capital funds, representing US$1.5 billion in disbursements.6
In comparison, the U.S. state of California had venture capital disbursments totalling over US$14.4 billion in 2009.7

Venture capital is an important source of funding for firms—especially for those at the earliest stages of development (e.g., seed or start-up companies) when capital is often difficult to secure and keep. However, venture capital is also used by more established and mature firms in search of additional equity.

In Canada, the distribution of venture capital for seed, start-up, and early-stage firms versus firms at later stages of development is almost equal (51 per cent for seed, start-up, and early-stage firms, versus 49 per cent for other stages of development).8
This distribution is similar to the venture capital allocation found in the U.S., Sweden, and the United Kingdom.9

In comparison, in Finland and Switzerland, venture capital activity is predominately focused on early-stage businesses—over 70 per cent of all venture capital investments go to seed, start-up, and other early-stage companies.10
Interestingly, venture capital activity in Australia and France is most prominent among their countries’ more established firms, where over 60 per cent of all venture capital dollars are distributed.

Which countries perform the best on the venture capital report card?

The top performers on the venture capital report card are the U.S., Sweden, and Switzerland. All three of these countries score an “A” grade, with venture capital accounting for over 0.075 per cent of each country’s GDP. The U.S. has the most developed private sector financing market.11
Venture capital investment in the U.S. accounts for 0.088 per cent of the country’s GDP—nearly three times that of Canada’s. Venture capital investment in Sweden represents 0.08 per cent of the country’s GDP. In Switzerland, venture capital accounts for 0.077 per cent of the country’s GDP.12

What can Canada do to improve its grade?

Canada needs to improve its grade on the venture capital report card. The country cannot afford to remain a “D” performer. To improve, Canada needs to embrace and foster a more dynamic culture of innovation and commercialization. It needs to support entrepreneurship and new business development as well, particularly among some of its non-traditional, emerging, or underserved sectors of the economy. Canada also needs to improve the way it organizes and leverages venture capital. It could benefit, for example, by instituting better mechanisms and tools that link entrepreneurs with venture capital (currently many Canadian entrepreneurs are not familiar with the process for raising venture capital money). A more sophisticated private equity and venture capital industry—one that is better equipped to identify, select, and mentor promising seed, start-up, and early-stage Canadian companies—could also help.

One initiative by the Canadian government is designed to boost Canada’s venture capital marketplace by investing $400 million in privately run funds that are capitalized by other investors.13
This approach should help the Canadian venture capital industry develop its capabilities (e.g., in terms of executing deals and providing needed discipline) while also providing critical finance for new Canadian ventures.14